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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Instruments, Laws and Procedures

Bharat Infra Ltd raises a USD 10 million ECB at a time when the rate is Rs 80 per USD, and at repayment the rate is Rs 84 per USD. Ignoring interest, what is the rupee loss from exchange movement on principal repayment, and why does it matter for ECB planning?

The loss is Rs 4 crore, because USD 10 million costs Rs 80 crore at drawdown but Rs 84 crore at repayment. This shows why an unhedged ECB borrower is exposed to rupee depreciation and why hedging is important in ECB planning.

  1. ARs 4 crore loss, showing that unhedged ECB exposes the borrower to rupee depreciationCorrect
  2. BRs 4 crore gain, because the rupee depreciated
  3. CRs 40 lakh loss, because only a tenth of the principal is affected
  4. DRs 3.2 crore loss, because the loss is computed on the Rs 80 rate

Explanation

Loan at drawdown is 10 million x 80 = Rs 80 crore. Repayment costs 10 million x 84 = Rs 84 crore. The loss is Rs 4 crore, as rupee depreciation raises repayment cost. Check: 10 million x 4 = Rs 4 crore. A gain is wrong because the cost rises.

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